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State Bank keeps discount rate

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State Bank keeps discount rate unchanged at 12.5pc for third consecutive time. KARACHI: The State Bank of Pakistan (SBP) on Monday kept the policy rate unchanged at 12.5 per cent for the third consecutive time in an attempt to counter rising inflation and a widening fiscal deficit.

The decision to keep the key rate unchanged was taken at a meeting of the Central Board of Directors of the State Bank of Pakistan held under the chairmanship of SBP Governor Syed Salim Raza.

The previous rate change was witnessed on November 24 when the central bank cut the key rate by 50 basis points to 12.5 per cent.The International Monetary Fund (IMF), while approving the fifth tranche of $1.13 billion for Pakistan on May 14 under the standby arrangement of $10.66 billion, advised the SBP for a cautious stance on the monetary policy as economic vulnerabilities were high, which may pose a threat to further rise in inflation. Pakistan s vulnerabilities remain high, due to persistent inflation, security-related spending pressures, energy sector problems and shortfalls in the revenue collection and external financing. These challenges highlight the importance of pursuing a credible fiscal consolidation, maintaining a flexible exchange rate and a cautious stance to the monetary policy and improving governance, the IMF had said.In the monetary policy statement, the central bank said that the economy remains on the road to recovery, but lacks the necessary infrastructure and sufficient macroeconomic stability to build up the momentum.The worsening power crisis and fiscal weaknesses are major impediments for sustainable economic recovery and macroeconomic stability, it said.Inflation has also started to increase gradually, it said, adding that in this scenario, the monetary policy, being a stabilisation tool, has to remain focused on its ultimate target of monetary and financial stability.Improvements were seen in exports of over $1.8 billion in each of the last two months, supported by steady workers remittances helped by the realisation of $656 million from the Coalition Support Fund (CSF) in May. This will help the external current account deficit close to 2.5 per cent of the GDP for FY10, the statement said.The SBP, however, expressed concern over government borrowing and said since beginning of 4QFY10, the government borrowing had surged to Rs1,310 billion till May 14 against the end of June target of Rs1,130 billion.Similarly, the government borrowing (net of deposits) of Rs206 billion from scheduled banks during July 1 May 14 FY10 is also substantial. This persistent borrowing from the banking system for the budgetary support coupled with expected borrowings for commodity operations in Q4FY10 is jeopardising the space for private sector credit, causing inertia in the market interest rates, running the risk of excess domestic credit creation, and increasing the debt burden of future generations, the SBP said.The Federal Board of Revenue s (FBR) revenue collection target of Rs1,380 billion is challenging as it has collected Rs1,026 billion during the first 10 months of the current fiscal year, it said. This would be quite challenging given a monthly average of Rs102 billion during the last 10 months. Even if the target is met, the revenue body s tax-to-GDP ratio is likely to be less than 10 per cent, which is one of the lowest in the world, the central bank said.There is a risk that the government may miss the revised fiscal deficit target of 5.1 per cent of the GDP, which will be inconsistent with the objectives of the macroeconomic stability, the State Bank said, adding that further deterioration in the fiscal account will have consequences for debt sustainability and the external balances.The central bank predicted that the revenue deficit, the difference between total revenue and current expenditure, would cross two per cent of the expected GDP in FY10, which was 1.5 per cent of the GDP in FY09.Regarding reduction in development expenditures, the central bank said that it may provide immediate relief, but damages the prospects of the much-needed investment in infrastructure such as electricity generation and human capital.All inflation indicators have shown upward movement in the recent months. The year-on-year Consumer Price Index (CPI) was recorded at 13.3 per cent in April and adjustments in electricity tariff, increase in domestic prices of petroleum products and volatile movement in various food items have given a spurt to inflation. Its persistence at a higher level indicates that a fall in productivity has played a roll, as well, the SBP said. This signifies an entrenchment of expectations of double-digit inflation, which must be checked to improve the prospects of sustainable economic growth, the statement said.The central bank said that the growth of 4.4 per cent in the large-scale manufacturing is encouraging. However, its sustainability would require supportive growth in the private sector credit and improvement in the availability of electricity, it added.

FPCCI concerned over no change in discount rate

By our correspondent

KARACHI: The Federation of Pakistan Chambers of Commerce and Industry (FPCCI) on Monday expressed concern over the monetary policy announcement, saying that keeping discount rate unchanged at 12.5 per cent would further deteriorate the economy. The business community was expecting significant reduction in the discount rate as it is a consensus recommendation of economists that the monetary policy should be eased to control adverse effects of recession and growth in the economy, said President FPCCI Sultan Ahmed Chawla. Owing to continued tight monetary policy, the industrial production is suffering, exports are declining, unemployment is on the rise, power outages are increasing, petroleum prices surge, resulting in rise in the cost of doing business. The government should not accept the ideas and proposals by the bureaucracy and foreign donors, which mostly proved to be against the interest of the country.



Highlights

• Power crisis, fiscal weaknesses impediments for sustainable economic recovery

• Improvements seen in exports of over $1.8 billion each in last two months

• Revenue deficit may cross 2 per cent of the expected GDP

• Govt borrowing surges to Rs1,310bn by May 14 against Rs1,130bn FY10 target

• Persistent bank borrowing for budgetary support hurting private sector credit growth

• Excess domestic credit seen burden on future generations

• Revenue collection target of Rs1,380 billion in FY10 seen challenging

• Tax-to-GDP ratio seen to be less than 10 per cent — the lowest in the world — Government seen missing the revised fiscal deficit target of 5.1 per cent


Courtesy : The News


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